ECON 545 Business Economics Course Week 6 Monetary and Fiscal Policy You Decide Answer
ECON545 – Week 6 You Decide Transcript
The U.S. economy has fallen into a recession. It is a severe and deep recession, and one that
some economic analysts say may persist for at least another year. The unemployment rate has
risen to levels not seen in over 20 years. The current unemployment rate is at 8% and is
expected to rise further. The inflation rate is -2.4 percent, meaning that overall, prices are falling.
You are the new senior economic advisor to the President of the United States, and he has
asked for your recommendation on how to proceed. Since you are an experienced Washington
consultant, you know that you should first consult several other experts and get their advice.
The following colleagues have expressed their insights and recommendations.
Keyplayers Text for Audio Recording
Kathy Lee, Former
Economic Advisor to
Consultant to the
Well, first we have to distinguish between fiscal policy and monetary
policy. As you know, the President does have some control over fiscal
policy, along with Congress of course – but concerning monetary
policy, only the Federal Reserve Bank can determine and execute
I would recommend that the President lowers interest rates further to
help businesses and consumers get back on their feet.
I think the President should consider raising taxes and reducing
government spending. This will help correct the budget deficit problem
and help the economy get rolling again.
People will respect this tough decision and once they see that the
economy is improving, they will not mind the tax increase as much.
I’ll just comment on Fed Policy, as that was my background and
expertise. As you know, the Fed has three tools with which to address
stability and the growth of our economy. They control the discount rate
and federal funds rate, open market operations, and the bank reserve
I think the Fed should leave interest rates alone, but strongly sell
bonds and raise the bank reserve requirement. This will increase the
money supply and allow banks to be more stable if they hang on to a
greater percentage of their customers’ deposits.
As I see it, we need both expansionary fiscal policy and expansionary
monetary policy. The President should work with Congress to increase
government spending and lower taxes.
As far as monetary policy is concerned, the Federal Reserve Board
needs to increase the money supply by buying bonds, raising interest
rates, and if necessary, raising the reserve requirement.
Your task is to take this advice and produce your own recommendation to the President. Do not
simply choose one person’s advice, but pick and choose from each recommendation that you
receive. Be sure to list what you believe and why you believe it is sound advice from each of
your colleagues, and also what you disagree with, and why you disagree with your
colleagues. Then, produce a consolidated recommendation of your own.
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